World Economy Review - October 2009

Morgan Stanley has warned clients that central banks in high-debt countries may try to stoke inflation as a deliberate policy to rescue governments and tackle the legacy of the crisis. It said the surge in the public debts of Western countries is comparable to the effects of war, with the big difference this time that aging populations and excess capacity will make it hard to erode the burden through economic growth.
Faced with a Hobson`s choice between inflation and default, central banks may conclude that it is the lesser evil to “monetize” public debt, even if they are independent bodies.
“If the fiscal path is deemed unsustainable, it may be preferable to create limited inflation early on -- to nip the debt problem in the bud - rather than to allow a mounting debt burden. We think the risk cannot quite be dismissed out of hand,” said the bank.
This would be a deliberate transfer of wealth from lenders to debtors, a political minefield. It would cause huge losses for bond holders.
Morgan Stanley said any country embarking on this course would risk investor flight. However, the policy might work if carried out openly by setting a higher inflation target for a limited time. “They would not want to scare the horses,” it said.
Former IMF chief economist Ken Rogoff has proposed a 6pc level until debt is tamed. Morgan Stanley did not name candidates but the Fed, Bank of England, and the Bank of Japan fit the bill.
Meanwhile, the IMF confirmed its growth estimates of 8.5% for the Chinese GDP in 2009 and 9% in 2010. For Japan, the group has predicted a 5.5% decrease this year and slight growth of 1.75% in 2010. For the G7 countries, the IMF is cautiously optimistic, as they believe that the recovery will continue in 2010, albeit weakly, and predicts modest growth of 1.25% in 2010.
Consumption in G7 countries will remain weak for some time and will keep the GDP in Asia below an average of 6.6% registered over the past 10 years. In the medium term, for the IMF, political decision makers in Asia must continue to help their economies until the recovery is self-sustaining, but without causing inflation to increase.

Economy of The United States

The U.S. economy expanded at a 3.5% annual pace in the third quarter, as massive government stimulus helped drag the economy out of the longest and deepest recession since the 1930s, the Commerce Department estimated. Along with improvements in key monthly figures on output and sales, the rise in real gross domestic product means the Great Recession is likely over in a technical sense, even as further job losses occur. A formal call on the end of the recession isn`t expected for months. In the past year, the economy has contracted 2.3%. The economy shrank 0.7% annualized in the second quarter and 6.4% in the first quarter. The figures are seasonally adjusted and adjusted for price changes.
US industrial production rose for the third consecutive month in September, by 0.7%, more than the 0.2% economists were expecting, the Federal Reserve reported today. Adding to today`s better than expected reading, was a sharp upward revision to August`s output gain, from 0.8% to 1.2%. Output, which now stands at a level of 98.5, has advanced at an annual rate of 5.2% over the third quarter overall. That`s the first quarterly increase since the Q1 2008 and the largest gain since Q1 2005. Over the year, output is still down 6.1%. September`s increased output was due largely to a 3.5% increase in durable output, including a 7.4% increase in the production of automotive products. Nondurable output increased 0.5% in September. Within major industry groups, manufacturing output rose 0.9%, mining output rose 0.7%%, while utilities fell 0.7%. Capacity use in US factories rose to 70.5% in September, marking the third consecutive monthly increase. Economists were expecting capacity use to come in at 69.7% from the 69.6% rate first reported for August (since revised up to 69.9%).
The Commerce Department said that the trade deficit declined 3.5 percent to $30.7 billion, surprising economists who had expected higher oil prices to push the imbalance to $33 billion. Oil prices did shoot up, but the volume of shipments dropped sharply in August. For August, exports of goods and services edged up 0.2 percent to $28.2 billion, the highest level since December. The strength reflected higher sales of American farm products including soybeans and wheat, and increases in sales of autos and related parts, industrial engines and telecommunications equipment. Imports dropped 0.6 percent to $158.9 billion, reflecting a 5.7 fall in petroleum imports to $21 billion. A big decrease in the volume of shipments offset a sharp rise in prices. The average price of a barrel of imported crude oil rose to $64.75, up from $62.48 in July and the highest since last November.
US consumer prices rose 0.2 percent, in line with expectations in September, government data showed on the back of lower increases in gasoline prices and a fall in food prices. The Labor Department`s consumer price index (CPI) showed a year-over-year decline of 1.3 percent, in a report being monitored for signs of deflation rather than inflation in light of the weak economy.
The core CPI, which excludes volatile food and energy costs, a figure that some economists say offers hints of future inflation trends, also increased by 0.2 percent for the month and is up by 1.5 percent from September 2008. Of the main components of the CPI, the index for all types of gasoline increased by 1.0 percent in September while that for commodities increased by 0.3 percent. The index for non-durables other than food increased by 0.4 percent and for durable goods by 0.4 percent. The CPI for services increased by 0.1 percent and that for food and beverages fell by 0.1 percent and for energy increased by 0.7 percent.

Economy of The European Union

The Eurozone`s economy shrank more than previously thought in the second quarter of 2009, data showed, because contributions from household demand and trade turned out to be smaller than initially estimated. Gross domestic product in the 16-country area shrank by 0.2 percent in the April-June period quarter-on-quarter and by 4.8 percent in annual terms, compared with the previously reported falls of 0.1 percent and 4.7 percent, Eurostat said. Economists polled by Reuters had expected the European Union`s statistical office to confirm its previous estimates. A plunge in inventories was slightly smaller than previously reported, as the drop in stocks of finished goods took away 0.6 percentage point from the overall second-quarter result rather than the 0.7 percentage point reported previously. But this was offset by a downward revision of the positive contributions of household demand and trade -- that from consumers was zero and from trade, 0.5 percentage point.
The recession turned out deeper than previously estimated in the Netherlands and Austria, Eurostat said. The data still showed that government efforts to support the economy with fiscal stimulus bore fruit as government expenditure added 0.2 percentage point. The data is likely to add to European Central Bank caution not to withdraw its monetary stimulus prematurely when the ECB meets to decide interest rates on October 8th. Economists believe the ECB will keep rates at a record low 1 percent until the third quarter of 2010 despite signs the euro zone may have returned to growth in the third quarter of 2009.
Industrial production in the Eurozone rebounded by 0.9 percent in August compared with the previous month, Eurostat said. In August, production of durable consumer goods in the Eurozone increased by 5.3 percent on a monthly basis and capital goods grew by 1.1 percent, while intermediate consumer goods and production of energy both increased by 0.5 percent. Non-durable consumer goods, however, declined by 1.3 percent, according to the European Union`s statistics office.
Compared with August 2008, industrial production in the 16 European Union countries that use the euro declined by 15.4 percent. In the 27-nation European Union, industrial production rose by 0.6 percent month on month in August and dropped by 13.5 percent year on year. Among the member states for which data were available, industrial production rose in 11 and fell in 10. The most significant fall was registered in Ireland, which was down 16.7 percent, while the highest increase was registered in Italy, which was up 7.0 percent.
Consumer inflation across the 16-nation euro zone remained in negative territory in October, while unemployment in the countries that use the euro rose to the highest level since records began in 1999, European Union`s statistics agency Eurostat said on October 30. Consumer prices were down 0.1 percent from a year earlier, compared with a 0.3 percent annual drop in September, AP reported. Analysts and officials had expected a rise on the year as companies and consumers started spending more after a long freeze in demand. The euro`s recent surge against the dollar undermined that because it reduced the Eurozone cost of dollar-priced oil. The euro rose to a 14-month high of $1.5020 against the dollar on Oct. 23.
Eurostat also reported Friday that Eurozone unemployment rose to 9.7 percent in September, the highest level since Jan. 1999. Some 184,000 more people were seeking work from August when the rate was 9.6 percent, according to the same source. Across the entire 27-nation EU, the unemployment rate rose to 9.2 percent in September from 9.1 percent a month earlier with 286,000 more people joining jobless lines. This is the highest rate since EU statistics started in Jan. 2000.

Economy of Asia

Japan`s GDP grew 3.7 percent on an annual basis in April to June, reversing the worst recession for Japan since the World War II.
Industrial output in Japan was up 1.4 percent on month in September, the Ministry of Economy, Trade and Industry said on Thursday, posting an index score of 85.1. The reading marked the seventh straight month of gain and also came in above expectations for a 1.0 percent increase following the 1.6 gain in August. On an annual basis, output was down 18.9 percent compared to forecasts for a 19.3 percent decline after the 19.0 percent contraction in the previous month. For the third quarter, industrial production was up 7.2 percent compared to the previous three months.
In the ministry`s survey of production forecast, production is expected to increase 3.1 percent in October and 1.9 percent in November.
Japanese core consumer prices fell 2.3 percent in September from a year earlier as the economy is mired in deflation due to weak final demand on top of slide in oil prices. While the retreat from last year`s spike in energy costs has continued to weigh on price comparisons, an index stripping out both energy and food prices showed deflationary pressure was mounting. The so-called core-core inflation index, similar to the core index used in the United States, fell 1.0 percent in September from the same month a year ago after declining 0.9 percent in August.
Japan`s jobless rate unexpectedly dropped to a four-month low in September, adding to signs that a recovery in the world`s second-largest economy is spreading to consumers. The unemployment rate fell to 5.3 percent from 5.5 percent in August, the statistics bureau said today in Tokyo. The median estimate of 29 economists surveyed by Bloomberg was for an increase to 5.6 percent and only one person predicted a drop.

Economy of Russia

The Russian economy contracted 8.6 percent in September, year-on-year, the Economy Ministry said, confirming its earlier estimate. The pace of contraction eased from the 10.5 percent seen in August. The ministry said the improvement was `linked both to a low base -- last year the fall in GDP accelerated in September -- and a resumption of monthly growth`. GDP has been growing on a month-on-month seasonal adjusted basis since June, and in September the increase was 0.5 percent. For the first nine months of 2009, gross domestic product (GDP) contracted 10 percent, the data showed. The Economy Ministry also forecast that in October, year-on-year inflation could come in at 9.9-10.0 percent. Russia`s industrial production grew 5.1 percent during September, according to official figures released, bolstering belief that economic recovery is under way. Output was still down 9.5 percent year on year, although that was less than the 12.6 percent drop seen in August, the Federal Statistics Service said. For the third quarter, output was up nearly 7 percent from the preceding quarter, the second consecutive quarterly rise.
Russia`s industrial production grew 5.1 percent during September, according to official figures released Thursday, bolstering belief that economic recovery is under way. Output was still down 9.5 percent year on year, although that was less than the 12.6 percent drop seen in August, the Federal Statistics Service said. For the third quarter, output was up nearly 7 percent from the preceding quarter, the second consecutive quarterly rise. Disappointing statistics in August had analysts warning that Russia`s recovery was set to be extremely volatile.
Consumer price inflation in Russia amounted to 8.1% in January-October and was zero in October, the Federal State Statistics Service said. The annual inflation, measured by comparing prices in October with October 2008, amounted to 9.7%. Core inflation, which excludes administrative and seasonal factors, was at 7.6% in January-October and at 0.3% in October, according to the service.
In January-October, prices of services rose 10.9%, prices of foodstuffs increased 5.2%, prices of foodstuffs excluding fruits and vegetables rose 6.3%, and prices of manufactured goods rose 9%. In October, prices of services fell 0.1%, prices of foodstuffs fell 0.5%, prices of foodstuffs excluding fruits and vegetables did not change and prices of manufactured goods rose 0.6%.